The latest data on credit cards by Equifax shows that delinquencies have fallen, subprime card accounts have increased and banks are issuing more cards over all. The levels are nowhere near as high as those before the recession but are banks returning to old tricks already, asks Duygu Tavan
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Equifaxs latest credit card data shows that delinquencies and credit utilisation have fallen, more prime and subprime credit cards are issued and credit limits have increased. Is this something to worry about or does it prove that the industry is returning to health?
Delinquencies fall
Delinquency rates have not stopped declining both on a month-on-month and year-on-year basis since August last year. The rate of decline slowed down and decreased since May this year. This does not signal a negative trend, however – it may simply mean that tighter credit and risk controls by banks are becoming more and more efficient, thus leading to fewer delinquencies.
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By GlobalDataThe delinquency rate as of August was 2.63% and Michael Koukounas, SVP at Equifax, says that this is near pre-recession levels. John Schratz, managing director at Eclipse enterprise consulting agrees: This is likely the result of a number of factors. The contraction in credit limits and loan values during the recession, combined with a focus away from lower score, higher risk prospects are paying dividends in terms of reduced delinquency and subsequent provisions. There is a lead time for the effects to emerge and the positive impacts of these have now emerged.
Utilisation rates have remained relatively flat, between 24-26%. There was a big jump in utilisation in 2008 due to credit tightening by the banks and, consequently, utilisation rates soared. After a peak in February 2010, when the utilisation rate surpassed 26%, credit usage began to fall again.
More prime and subprime cards
The number of new credit card accounts opened by the end 2010 were 2.8% higher than at the end of the prior year and amounted to almost 33 million – which signals the return in confidence among banks as in the twelve months to year end 2009, the number of credit cards issued had slumped by 42.3% to just 32 million. This figure was less than half of that at year-end 2006.
The year-end 2010 figure of 33 million credit cards is still less than half the amount opened at year-end 2006 – but the year-on-year volume growth certainly initiates an optimism among issuers. The year-to-August figures support this optimism as the number of cards issued by August 2010 was 9.7% higher than the corresponding period in 2009. The growth trend then accelerated in the twelve months to August 2011.
Unsurprisingly, the volume of credit cards issued to subprime borrowers had slumped by 60% to 7.5 million accounts in 2009. By year-end 2010, this figure had risen by 12.4% to 8.5 million. Banks have since tuned their focus on subprime borrowers again and new subprime credit card accounts opened in the twelve months to August 2011 soared by 64% to 5.4 million. This figure is of course a far cry from the 12.6 million accounts opened in the year to August 2006, but, again, the return to growth signals further positive metrics.
These statistics may suggest a return to old tricks: In light of regulatory changes, have banks begun to issue more credit cards to discourage the use of debit cards?
Schratz doubts that. I dont think the data specifically points to this. After austerity measurers imposed during the recession and the subsequent reduction in both delinquency levels and write-offs achieved, and card origination during that period, card issuers relaxed underwriting criteria. This resulted in growth in new cards issued, he says.
Another consultant, Paul Lucraft, does not see a direct link between the dramatic increase and banks anticipation of the effects of Durbin, simply because the increase is coming from a very low base. He does not cancel out such a possibility, but emphasises that because Durbin has not taken effect yet, any possible impact it may have on credit card issuing is unlikely. Rather, he adds, it was the Card Act that curbed irresponsible lending.
This viewpoint is supported by Koukounas, who says that risk managers are extremely conservative nowadays. The ways used to drive growth in 2007/2008 those would not work anymore due to the changes in regulatory and risk management. What we are seeing instead is a reaction to the improved performance of consumers paying off their debt, he explains.
Limit for new cards
As of June 2011, the limit for new credit cards was almost a third higher than the corresponding period a year ago. It remains to be seen whether the year-end figure will return to positive metrics, too – it is not unrealistic to assume so. While the average credit limit for both prime and subprime segments is still nowhere near pre-recession levels, the year to June 2011 figures confirm that a steady return to those levels is under way.
The credit card limit for subprime borrowers fell dramatically in the twelve months to year end 2008 and 2009, by 33.2% to $27.8bn and 69.7% to a meagre $8.4bn respectively. Between fiscal 2009 and 2010, this decline slowed down to 3.9% year-on-year to $8.1bn. Given the trends obvious in the year-to-August metrics, however, it is highly likely that credit limit for subprime borrowers will increase by the end of 2011 as, already, the limit in the twelve months to August 2011 has soared by 69% to $5.4bn.
Another key metric to highlight is the percentage of the average subprime credit card limit compared to the prime credit card average credit limit: The average subprime credit limit in 2006 was 34.5% of the average credit card limit. In 2007, this metric fell slightly, to 32.3%, but grew to 34.8% in 2008. This indicates that financial institutions, at that point in the recession, had not curbed credit limits to subprime borrowers yet. They did so in 2009, when subprime average credit limit was 27.6% of the average credit card limit. This declined further to 24.8% in 2010. But here is the interesting metric – and one to look out for in the months to come: Average subprime credit limit as of June 2011 was 27% of the average credit card limit.
